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Emerging Markets: China

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China's economy grew by 11.9% in the first quarter of the year, its fastest rate in three years, as retail sales jumped 17.9% and fixed asset investment increased by 25.6%. Foreign trade, which totals imports and exports, shot up 44.1% year on year and 34.9% compared to the fourth quarter of last year. The unexpectedly high growth figure has led to some concern that the economy may be overheating. While the consumer price index rose by only 2.2% in the first quarter, producer prices went up by 5.2%. Still, the exceptionally high figures also stem to some degree from the government's method of statistical tracking, which compares figures on a year-over-year basis. China's economic growth in the first quarter of last year was the slowest in more than 10 years, giving the most recent figures a low base of comparison.

China's GDP numbers did not offer the only surprises last month. China in March posted a trade deficit of $7.24 billion, breaking a 70-month streak of consecutive monthly surpluses. Demand for oil and raw materials helped boost imports by 66% year on year, while exports rose by only 24.3%. Taiwan, Japan and South Korea accounted for much of the trade deficit, while China continued to run trade surpluses with its two largest trade partners, the European Union and the United States. The deficit figure will give some support to domestic proponents of China's rigid exchange rate regime but is unlikely to silence critics in foreign markets that charge that China's peg to the value of the US dollar gives the country an unfair trade advantage.

China's currency peg has become a contentious issue in China-US relations, with some US lawmakers calling for increased tariffs on Chinese goods. US treasury secretary Timothy Geithner postponed an April 15 deadline for a decision on whether or not to label China as a currency manipulator. Geithner also made an unexpected stop in Beijing following a trip to India, while US president Barack Obama and Chinese president Hu Jintao met on the sidelines of the Nuclear Security Summit in Washington, DC, last month. While neither meeting produced any concrete measures on currency policy, observers are watching China closely for signs that the central bank will loosen the country's peg to the US dollar.

Currency appreciation not only would relieve pressure from trading partners but could ease inflation domestically. Responding to calls from the government to support the economy during the global financial crisis, Chinese banks extended a record-breaking 9.59 trillion renminbi ($1.4 trillion) in new loans in 2009, almost double the amount of the previous year. While the new lending helped the country to achieve growth of 8.7% last year, the increase in money is beginning to show in recent measures of inflation. China's consumer price index (CPI) rose by 2.4% year on year in March, and housing prices in 70 major cities jumped by 11.7%.

Meanwhile, the China Banking Regulatory Commission (CBRC) is taking steps to rein in bank lending. CBRC director Liu Mingkang, speaking at the Boao Forum last month, said that the regulator had asked banks to review and report on their loan portfolios by the end of June. Loans given to government-owned companies will be included in this review, according to Liu. The review is part of the government's effort to prevent asset bubbles as well as address concerns that local governments financed economic stimulus measures through loans given by the banks to local state-owned companies. In March the CBRC also asked banks to limit real estate loans to projects that have already begun, preventing new lending based on land ownership alone. Loan growth has already begun to slow, with banks extending only RMB511 billion in new loans in March, down from RMB700 billion in February.

While the CBRC is working to cool the real estate market, the China Securities Regulatory Commission (CSRC) is expanding investment options on the country's capital markets. The CSRC announced earlier this year that it would allow futures contracts to be traded, and the China Financial Futures Exchange began accepted applications in February. The stock index futures exchange opened on April 16, with the initial contracts set for the months of May, June, September and December. The contracts allow investors to bet on the future value of the CSI 300 Index, which includes stocks from 300 companies listed on Shanghai or Shenzhen stock exchanges.